Brexit – the Endgame Approaches?The approaching year-end sees the negotiations on the European Union – United Kingdom future relationship move into a potentially difficult and turbulent phase as an eighth round of negotiations begins, with each side cautioning that time is running out.

While a certain amount of Brexit fatigue is inevitable, UK-based financial services firms and their counsel will once again turn their attention to what this means for their organisations and how to ensure continued access to European markets.  Similarly, EU-based firms seeking to service UK clients will also have to consider what steps they should now take to ensure access.

The advice of both domestic and European regulators remains broadly unchanged from that issued in the run up to previous 'cliff-edge' type scenarios during the Brexit process.  Regulators have consistently signalled that the market should prepare for a worst case scenario and not to count on equivalence or similar arrangements being in place by year-end. 

In Ireland, Walkers has seen a marked increase in the number of UK and global firms investing significant time and resources into obtaining Irish authorisations and licences to ensure an appropriate regulatory footprint in the EU which can be passported across the region. These authorisations span the banking, asset and investment management, insurance and FinTech sectors, bringing welcome additional diversity and expertise to the Irish financial services landscape. International financial services groups with operations already established in Ireland have also expanded existing operations significantly.  In addition to Brexit-related moves, firms seeking authorisation in Europe for the first time are also exploring Ireland.

While a number of newly authorised firms are up and running, a substantial portion have not yet fully commenced operations or transferred books of clients and business from their existing UK operations.

A second cohort of UK firms that have not opted to establish Irish/EU operations will also be re-examining their contingency plans and reliance on exemptions in each EU jurisdiction (such as reverse solicitation, restricting access to certain services, the Irish MiFID 'safe harbour' etc.) to continue to access and service clients.

As firms move to execute their Brexit contingency/go-live plans, it will be important to ensure these have been updated and assessed against new developments.  Where the passage of time has caused such plans to change materially (for example due to changes in staffing, financial projections, client migration plans etc.) firms should consider how to address and, where necessary, engage with regulators on these changes in advance of the year-end deadline to ensure appropriate solutions can be identified in good time.

Firms and their counsel should also be ready to address new issues, including the impact of Covid-19 on their business models and staffing structures.  For example, having senior staff commute to Ireland/other EU jurisdictions on a fly in - fly out basis may no longer be workable, given quarantine requirements between different jurisdictions.  Similarly, firms hoping to smooth client transition through the use of 'chaperoning'-type models drafted prior to Covid-19 for relationship management and/or sales and distribution meetings should now consider the practical implications of the current environment on these models.

Some limited regulatory flexibility in light of Covid-19 is to be hoped for in the shorter term.  However, having staff based in the UK as a 'third country', particularly when interacting with EU clients, has the potential to raise a host of difficulties including regulatory and taxation permanent establishment issues.

While firms and their counsel consider the substantial challenges and potential disruption discussed above, the current trend of rapid regulatory change continues unabated.  Examples of hot topics across sectors include ESG regulatory reform, enhanced outsourcing regulation, the fifth money laundering directive and a general trend of increased and more intrusive regulatory scrutiny with more frequent regulatory engagement. 

Taken together, all of these issues point towards a challenging end to 2020 that will place substantial additional demands on regulated financial services firms and their counsel.  Those firms that have invested time and resources in their post-Brexit contingency planning will now see the benefits of their preparedness and should be well placed to capitalise on the opportunities that the future will bring.

By Eoin O'Connor and Niall Ester of Walkers